Advanced Valuation: Determination by the Determining Valuer - Essay Example

Advanced Valuation Section Inclusion of Rent Incentives in a Rent Review: Determination by the Determining Valuer 0 Introduction: Usually all the commercial leases contain provisions for the review of the rent payable during the pendency of the lease period. Such review provisions may be automatic providing for a fixed increase "On the other hand, there are those provisions which the parties must activate before they operate and which contain machinery for a rent review. An example of a provision of this type is a current market rent review clause." (Mark Sheridan 2006)1 The question as to whether the rent review process is to be initiated either by the landlord or the tenant is to be provided in the relevant provisions of the lease. When the tenant doesn't have the right to initiate the process there are other provisions governing the situation. Similarly under the market rent review clauses, a time limit would have been prescribed for activating the rent review process. Though the determining valuer has wide discretionary powers, certain criteria like current market rent, assumption of vacant possession of the property, lease incentives and the willingness of the landlord and tenant should be taken into account by the valuer in the rent review process. 1.1 Lease Incentives: At times of falling markets, incentives are granted by the landlords to the tenants including a rent free period or a contribution to the cost of the tenant for making the premises fit. In many commercial leases, the agreements contain clauses to disregard the incentives. However it would be disadvantageous for the tenant to allow the disregard as it will result in review of 'face rent'. Face rent is usually an inflated one because of the incentives being included in there. If incentives are disregarded the review would be based on a "comparison of other 'face rents', again ignoring that they are inflated because of the incentives provided under the other leases used as comparisons." (Mark Sheridan 2006)2 However, the valuer would be compelled to take into account the initiatives, had the lease deed been drafted efficiently. Such a process would result in a meaningful review of the 'effective rent' as against the unrealistic 'face rentals'. "If incentives originally granted at the commencement of the lease are to be taken into account or disregarded then the lease on such a material issue would include a provision that would express the intentions of the parties" (Peter Dempsey)3 In any case, it must be noted that the rent review provisions have to be interpreted by the determining valuer within the context of the whole lease. In general if the determining the valuer is unable to come to a definite conclusion, the determining valuer should seek independent legal advice or the advice from independent experts on the subject. valuer should take care not to exceed his area of expertise and arrive at decisions against the meaning of the rent review clauses. Wherever there supporting legal opinions the valuer should follow such legal opinions only. Under circumstances where He is not expected to decide on issues that are outside the scope of his core competency. Case Law: Citation: Orti-Tullo& Anor v Sadek & anor 2001 ATC 4688 Judge Bryson J Key Issues: The plaintiffs challenge the determination by a valuer of the current market rental value of commercial premises on the exercise of an option to renew a lease. Facts of the Case: The defendants were carrying on the business of a service station on the land leased to them as lessees for a lease period of five years with an option to renew for a further period of five years. The plaintiffs were the lessors. The lease deed provided for the lease rent under one of the clauses of the deed but with no provision for any annual market review. Though there was no dispute about the extension of the lease period, there was a dispute on the rental value determined by the valuer and the petition was to set aside the valuation thus carried out by the valuer as the valuation did not represent a fair current market value since the valuer omitted to consider the incidence of the element of GST. The Decision: It was decided that the valuer has followed the usual professional practice in assessing the rental value. "There is no evidence tending to show that the assessment of $60,000 as the current market rental is improbable or unreliable. No mistake of the valuer has been established or exposed to consideration of its effect in the law" (Australian Taxation Office)4 It was decided that since the valuation is acceptable as per law, the plaintiffs' petition for setting aside the determination is dismissed with costs to the defendants. Relevance of the case to the Valuers: This case has clarified the position of the valuer with regard to his duty for determining the current market value. So long as he follows the usual valuing principle the failure to take into account some small issues which do not materially affect the valuation, his determination of the current market value is acceptable under law. Section 2 Distinction between a 'speaking' and 'non - speaking' valuation A speaking valuation is based on a determination report that provides a clear message to the reader that the valuer has fully understood the requirements of the lease and the representations put forth to him by both the landlord and the tenant. The report should also indicate that the valuer had placed reliance on the particular evidence. The report should also guide the reader through the though process adopted by the valuer in determining the valuation. As has been decided in the case of ORTI-TULLO & ANOR v SADEK & ANOR 2001 ATC 4691 when "the determination does not expose on its face the underlying facts such as comparable agreements for leases or other material on which the valuer relied, and does not state any analysis or reasoning showing how the rental as determined was derived", it doesn't have the character of the speaking valuation. (Australian Taxation Office) Thus with a 'speaking valuation' though detailed reasons and conclusions are not essential, the method of arriving at the valuation and the reasons there for should be stated. The speaking valuation is not expected to provide details as the judgments of courts or awards of arbitrators. The basic test to distinguish between speaking and non speaking valuation is to ascertain that whether the terms of engagement have been met. The method of arriving at valuation should also be ascertained. When these conditions are not met the valuation can be termed as 'non-speaking'. "The most important factor is that the valuer addresses the matters required by the lease. If that is not done then the valuation is liable to be set aside by the courts on the ground that it does not comply with the lease." (Mark Sheridan 2006)5 Kanivah Holdings Pty Ltd v Holdworth Properties Pty Ltd (2001) NSW ConvR 55-985 and Decision of NSW Court of Appeal: The decision in this case proves that it is difficult to set aside a valuer's determination of market rent when the determination was made as a 'speaking' one. In this case Kanivah entered in to a 80 year lease agreement that provided for the three yearly market reviews of the rent. In the year 1999 since the parties did not agree on the current market rent valuers were appointed independently by both the tenant and the landlord. There was a huge difference in the rent determined by the vluers and hence a fourth valuer under the rent review clause to determine the issue. Dissatisfied with the determination f the fourth valuer, the tenant sued the valuer for damages for negligence in the determination. "The judge confirmed the principle that where the lease stipulates that the valuation is to be final and binding it may only be successfully challenged if tainted by fraud or collusion or if it is not made in accordance with the lease."(Focus on Leasing 2001)6 The judge further observed that: The fact that the valuer has considered the highest and best use of the site, to make a fair determination by commissioning plans and feasibility studies showed the use of the required professional skill and judgment. The evidences available supported the fact that his valuation based on comparative sales had proper regard to the valuation principle as required under the lease. Though the term 'speaking' valuation is not mentioned the judge was more than satisfied that the report contained "sufficient written reasons" in that the valuer had showed that he had complied with all the requirements of the relevant lease clause. The judge did not consider it necessary to show the details of comparable sales evidence or the relevant characteristics of those properties. This judgment clearly established the principles of 'speaking valuation' and the valuer was adjudged as not negligent since he prepared a 'speaking valuation'. On the same grounds the Supreme Court of New South Wales upheld the judgment delivered by the lower court and refused the special leave petition filed by Kanivah with costs. References: 1. Australian Taxation Office http://law.ato.gov.au/atolaw/print.htmDocID=JUD%2F2001ATC4688%2F00001 2. Focus on Leasing (2001) Questioning the Umpire's Decision Issue 5 June 2001 http://www.aar.com.au/pubs/pdf/fmres/foljun01.pdf 3. Mark Sheridan (2006) Market Rent Review Provisions Australian Government Solicitor http://www.ags.gov.au/publications/agspubs/legalpubs/commercialnotes/ComNote21.htm 4. Peter Dempsey Rental Determinations as Part of the Rent Review Process http://72.14.235.104/searchq=cache:qB6C9BEV9YsJ:www.act.api.org.au/DOWNLOADS/Rental%2520Determinations.doc+court+cases+in+rent+review+determination+%2B+australia&hl=en&ct=clnk&cd=2&gl=in&client=firefox-a Read More